Wouldn’t it feel great if you could settle all of your debt and get completely out from under that huge load of debt that’s weighing you down?
You can do this under what’s called debt settlement, which is basically negotiating a settlement with your creditors. In many cases you can actually settle your debt for $.50 on the dollar. Sometimes you can settle for as little as 25 cents on the dollar.
How can this be?
Close your eyes and picture yourself as the manager of the collection department of a major credit card provider (bank). You know the state of today’s economy and that more and more people are filing for bankruptcy every week. You also know from experience that the chances of getting money from a debtor become worse as the debt ages. If you thought you could collect $.50 on every dollar owed by a debtor or risk not collecting anything if that person files for bankruptcy, what would you do?
You also know that the debt will leave your bank after about six months and go to a third-party collection agency that will take 25% or more right off the top of whatever they are able to collect. And that company probably won’t be able to collect more than 70% of the debt anyway. This means you’ll probably never be able to collect much more than half the money owed anyway. So, when you look at it this way, collecting 50% of the debt doesn’t seem like such a bad idea.
Hiring a debt settlement firm
Debt settlement is sometimes confused with debt consolidation. When you consolidate your debts, you make monthly payments to a debt consolidator who then takes a fee and passes the rest of your money onto your creditors. However, in debt settlement, you make monthly payments, the debt consolidator takes a small fee and puts the rest of the money into a trust or special-purpose account. Your creditors are not paid out of this account until they agree to settle.
These debt settlement firms negotiate the debt settlement for you. They will work with your creditors to negotiate your balances owed down to the smallest amounts possible. You then make one monthly payment in an amount you can handle. As noted above, the settlement firm will put this money into a trust account insured by the FDIC where it will be used to satisfy your debts. You can expect to settle all your debts within 24 to 48 months and will have a payment plan you can live with.
A debt settlement firm may also be able to help you with what is called debt consolidation/debt relief. This is a type of debt relief where you take out a loan, using property such as a home or some other form of real estate as collateral. This money is then used to pay off your debt. As we reported above, this can be a great way to reduce a number of monthly payments to one simple monthly payment that will be much more affordable.
Using a debt settlement for can be a good way to get out from under that burden of debt in a fairly painless way. However, you need to make sure that you pick a good, reliable firm and one that does not charge a large fee upfront or take a monthly fee from your bank account for their services, which might reduce the incentive for your creditors to settle quickly. In fact, one financial expert counsels consumers to look for debt settlement companies that will charge you only after they have made a settlement, and that charge based on the amount they can reduce your outstanding balances owed.
Do-it-yourself debt settlement
A good alternative to hiring a debt settlement firm is to settle the debt yourself. While this may seem a bit scary, it can save you a lot of money–that you would have paid to a debt settlement firm–that you can then use to help pay off your debt.
To show how this works, let’s take a hypothetical example that you owe $10,000 on each of five different credit cards or a total of $50,000. You’ve been paying $1250 per month in minimum payments so that your total debt has remained the same or have even grown bigger due to over-limit penalties or late fees. Plus, you may now be missing payments due to new financial pressures.
The first thing you will want to do is put that $1250 in a savings account instead of making those monthly payments. Your telephone will undoubtedly start ringing off the hook. When you feel the right moment has arrived, call your creditor to inform them of your financial hardships and that you would like to “settle” your account. The timing of when you do this is critical. It is usually based on how late you are and the amount of funds you have available for settlement. During the initial months, most credit card providers will not be interested in settling. In fact, it may take five to six months or more before you can reach an agreeable settlement.
Over the course of that five to six months, you set aside $5000 in your settlement fund because you haven’t been sending payments to your creditors for three to four months. If one of your five creditors decides to accept a 50% settlement with the understanding that you will provide payment of the full $5000 within 90 days, be certain to get a written settlement offer from the bank. You then release the funds to the creditor and document everything to protect yourself.
It’s almost as if you had waved a magic wand and reduced that $10,000 worth of debt to $5000 and totally wiped it out. Now, after just five months, your debt is just $40,000, instead of the original $50,000. In short, you’ve eliminated 20% of your debts in just five months.
While companies that do debt settlement claim you can take as long as 36 months to settle all your accounts, that’s just a sales pitch. There is a tremendous legal risk when you try to take that long to settle all your debts. Most financial experts say a better answer is to negotiate multiple settlements at the same time and work your plan on what’s called a “fast-track” basis. In this case, fast track is defined as 12 months or less. You do this with a combination of monthly savings that formally went to those minimum payments and in funds from other sources such as tax refunds, family assistance or a retirement account.
Using our $50,000 example, you would need $25,000 to settle a debt if 50%. You should have $15,000 available over a 12-month period from your monthly cash flow, which would leave $10,000 that you would need from other sources. You could perhaps get a loan of $5000 from your retirement account, a tax refund of $2000, plus borrowing $3000 from your family and you’re there. Of course, you will have to pay back that family or private loan in the second year after you have fully paid all your creditors. Your monthly payments should still fit easily within your original $1250 a month, so that after 18 months you would be completely debt-free–without spending a cent more per month then when you were making those minimum payments.
Now you can begin to see why debt settlement is such an attractive way to manage your debt problems.